Plans by the Solicitors Regulation Authority (SRA) to replace the Solicitors Indemnity Fund (SIF) with an in-house solution have been backed by the Law Society.
It puts the national body at odds with the ‘Joint V’ of major local law societies – Birmingham, Bristol, Leeds, Liverpool and Manchester, which want to retain the existing arrangement, albeit with some modifications.
The Law Society was the fiercest critic of the regulator’s previous proposals to abolish the SIF and leave solicitors to buy cover on the open market for claims made after the six-year run-off period following closure of law firms.
The SIF was first scheduled to shut in 2017 but the deadline has been repeatedly extended by the SRA, most recently to September 2023, over concerns that law firm owners would face an uphill struggle to find alternative cover.
The SRA dropped its open market approach in a discussion paper this summer, before following up with a consultation on its in-house solution in October, while admitting that the majority of respondents to the discussion paper preferred the alternative option of retaining the existing arrangement.
In its response to the consultation, the Law Society said the SRA’s in-house scheme “will ensure consumer interests are protected” as the new proposals were intended to “replicate the same access to, and scope of, indemnity as SIF”.
It went on: “We previously voiced our opposition to any reduction in the scope of cover for consumers, from what is currently provided by the SIF. We are satisfied that the new scheme should provide the same protections.”
The Joint V response criticised the SRA’s estimate that the in-house option would save around £500,000 in costs.
This was calculated by reference to the costs of the assigned risks pool (ARP), which the response said was not a realistic comparison; further, the SRA was “unlikely to have the required expertise in professional liability claims, which bear no comparison with Compensation Fund claims” and the lack of which “contributed to the collapse of numerous insurers”.
The five also criticised the scope of the data used by insurance adviser Willis Towers Watson in its advice to the SRA on the possible savings.
They urged the regulator to conduct another consultation on the two options.
Though supportive, Chancery Lane said there were a number of elements of the new scheme where it needed more detail.
These included removing the Law Society’s power to appoint arbitrators in the event of a dispute, though the society said it had recently been suggested by the SRA that, where an independent arbitrator was needed, it would “invite an appropriate independent body” to appoint one.
Under the new regime, any “determination of the ultimate use of any residual surplus on termination of the fund” was to be transferred from the Law Society to the SRA.
The Law Society opposed this. “Given the origin of the fund (contributions made by Law Society members) and the underlying rationale for giving the Law Society the power and function to make decisions about use of residual surplus (that the money raised from the profession is held in a de facto relationship of trust), the new scheme should not disturb this arrangement.”
The response said that, following recent discussions, the SRA had agreed that, in the event of closure of the new scheme, funds would be transferred to the society “to determine how they could be used for the overall benefit of the profession”.